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  • 1.  Help with question

    Posted 11-25-2020 11:46 AM

    Wen Seng operates an ice cream shop. He is trying to decide whether to expand his business to include ice cream cakes. He will need some additional space that will cost him $7,400 per year at the end of each year and some additional equipment that will cost $14,000 up front. The ice cream cakes will provide an extra income of $13,000 per year at the end of each year. The business is expected to last 25 years. The discount rate (or interest rate) for Wen Seng's new business is 6%. What is the Net Present Value of the ice cream cake project? (Assume there are no taxes.)


    HELP!!!!



  • 2.  RE: Help with question

    Posted 11-26-2020 03:26 AM
    Hi,

    Intial Investment = 14000   ; PV of additional space = 7400* 12.783 = 94594.2   ; PV of income = 13000*12.783 = 166179

    NPV = 166179 - (14000+94594.2 ) =57584.8

    Since options aren't given, not sure whether my solution is right.
    Please correct me if I'm wrong.

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    Sanjana
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  • 3.  RE: Help with question

    Posted 11-26-2020 05:00 AM
    As per the question the incremental income every year would be Incremental Income - Incremental Cost i.e,

    $13,000 - $7,400 = $5,600

    PV of annuity factor for 25 years at 6% discount rate would be ​12.783 

    So the PV value would be $5,600 * 12.783 =  $71,584.80

    Net present value   = Initial outflow - PV of future cash flows
                                   = $71,584.80 - $14,000.00
                                   = $57,584.80

    ------------------------------
    Ashvin Kulkarni
    Accountant
    Pune
    India
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  • 4.  RE: Help with question

    Posted 11-26-2020 05:02 AM
    *Net present value   = PV of future cash flows - Initial outflow
                                   = $71,584.80 - $14,000.00
                                   = $57,584.80

    ------------------------------
    Ashvin Kulkarni
    Accountant
    Pune
    India
    ------------------------------